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4.4 Price
Chapter 27
Price
 Price is the amount
paid by consumers for
a product.
What else does PRICE say?

Determines the degree of value added to “bought-in”
components.
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Bought-In
Pieces purchased from other
manufacturers to create a whole
product.
Influences the revenue and profit of a business due
to impacting demand for a product.
Reflects the marketing objectives of the business.
Establishes the psychological image and identify of
a product.
Factors in determining price
1.
2.
3.
4.
5.
Costs of production
Competitive conditions
in the market
Competitors’ prices
Marketing objectives
Price elasticity of demand
What?
(Measures the responsiveness of demand following a change in price.)
6.
Whether it is a new or existing product
Pricing Strategies

Cost-Based Pricing

Firms determine the costs of producing and supplying
a product and then ADD money on top of this
calculated costs to determine the selling price.

Cost-Plus Pricing Adding a fixed mark-up for profit
to the cost of the item.
This method is popular with retailers. They take the
cost of the item and add a mark up percentage to
determine selling price.
Cost of bought-in materials: $40
50% markup on cost = $20 Selling price= $60

Pricing Strategies
(Cost-Based Continued…)

Full-Cost Pricing (or absorption-cost pricing)
 This pricing strategy is similar to cost-plus pricing.
 Used in manufacturing companies.
 The fixed and variable costs are allocated to manufactured
products to determine cost, then a markup is added to
determine selling price.

5000 Training videos are produced
$10,000 fixed costs
$5 variable costs per video
$10,000 + (5000 X $5) = $35,000 total cost of videos
Average unit cost = $35,000 / 5000 = $7 cost per video

A markup is added to the average video cost to determine
selling price.
Pricing Strategies
(Cost-Based Continued…)

Marginal-Cost Pricing
 Basing the price on the extra cost of making one additional
unit.
 This pricing scheme could gain market share and increase
sales.

HL
Assume that the total cost of producing 10,000 units is
$50,000. If you produce a total of 10,001 units the total
cost is $50,002. That would mean the marginal cost—
the cost of producing the next unit—was $2.
Pricing Strategies
(Cost-Based Continued…)

Contribution-Cost Pricing
 Basing the price on the variable cost of the product plus extra
to contribute towards covering fixed costs and profit.
 If enough units are sold, fixed costs are covered and a profit
will be made.

HL
Assume that the variable costs per unit is $2. The sales
price is set at $3. $1 can be contributed to cover fixed
costs. If fixed costs are $1000, 1000 units will need to
be sold before a profit is made.
Pricing Strategies

Competition-based pricing
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The company will base its price upon the price set by its
competitors.
Price Leadership One dominant firm in a market
sets a price and the other firms
simply charge a price based upon
the price set by the market leader.
This occurs in markets dominated by a few firms.
Examples: Airlines, Gas stations, cell phone service
Pricing Strategies
(Competition-Based Continued)
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Going-Rate PricingThe price charged is based upon
a study of the conditions that
prevail in a market and the prices
charged by major competitors.
This occurs in markets where pricing information is
easily determined by customers and can be easily
compared.
Examples: Internet
Pricing Strategies
(Competition-Based Continued)
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HL
Predatory pricing
Deliberately charging less than competitors in order
to force them out of the market.
This practice is illegal in the European Union. It is
difficult to prove.
Pricing Strategies

Market-Based Pricing
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Pricing set based upon the marketing objectives of the
company.
Penetration Pricing
Setting a low price
supported by strong
promotion in order to
achieve high volume
in sales.
This occurs when firms are trying to obtain market
share. If successful, the price can increase later.
Examples: Snack foods
Pricing Strategies
(Market-Based Continued)
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Market Skimming A high price is charged for a new
product that has little or no
competition.
This strategy is used to maximize short-term profits until
competitors enter the market and to project an exclusive
image.
Examples: Pharmaceuticals,
Technology products
Pricing Strategies
(Market-Based Continued)
 Price
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Discrimination
Charging different groups of consumers different prices
for the same goods or services.
Examples:
Airline tickets, bus fare, train tickets,
movie theatre tickets, restaurant
meals, grocery discounts.
Senior citizen discounts,
children’s prices vs adult prices
HL
Pricing Strategies
(Market-Based Continued)
 Loss
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Leader
Product sold at a very low price to encourage
consumers to buy other products.
Commonly done in the grocery industry.
Example:
Milk, bread, soda, or chips are sold at a very low price –
perhaps at a loss – to entice buyers into the store.
Selling computer printers below cost or
giving them away for free so expensive
ink cartridges can be sold.
HL
Pricing Strategies
(Market-Based Continued)
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Psychological Pricing

Setting prices to advantage of a customer’s perception
of value of the product.
Common for prices to be set below the key price to
make the product appear cheaper than it is: $999
instead of $1001; $1.99 instead of $2.01
Prices are set to coincide with market perception of the
product even if the product has a low production cost.
Setting the price too low would create a perception of a
cheap product. Setting the price too high could
alienate buyers.
1.
2.
HL
Pricing Strategies
(Market-Based Continued)
HL
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Promotional Pricing
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Special low prices used to gain market share or sell off
excess stock – includes “buy one get one free” offers.
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Widely used pricing strategy to stimulate sales for
limited periods of time usually during low product
demand periods or to promote the opening of a new
store.
Elasticity

The quantity demanded for products as the price for
them rises or falls.
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Goods that are “needs” (milk, bread, gas) are
considered “inelastic”. The demand is steady
regardless of price.
Goods that are “wants” (steak, expensive cars,
jewelry) are considered “elastic”. The demand for
them decreases as their price increases.
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HL
Price Elasticity of Demand
(PED)

The quantity demanded for most products
increases as the price of the product falls.
High demand for
inexpensive
products
Demand
HL
Price
Lower demand as
price increases
Demand
Price
Income Elasticity of Demand
(YED)

The quantity demanded for products as income
rises or falls.
High demand for
inexpensive
products when
income is low
Demand
HL
Price
Low demand for
expensive products
when income is low
Demand
Price
Income Elasticity of Demand
(YED) - Reverse when income is
HIGH

The quantity demanded for products as income
rises or falls.
High demand for
expensive products
when income is high
Low demand for
inexpensive
products when
income is high
Demand
HL
Price
Demand
Price
Cross Elasticity of Demand
(XED)

The quantity demanded for a product following
the price of change of ANOTHER product.
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Your competitor lowers the price of his product is
likely to cause a reduction in price in your product
– positive elasticity
HL
Advertising Elasticity (AED)
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The quantity demanded for a product following advertising
spending.
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Typically elasticity is high when advertising consumer
goods….the more advertising $$ spent, the more products
sold…..the fewer advertising $$ spent, the fewer products
sold.
Not true when:
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HL
Competitors are spending more advert $$ than you.
The campaign is expensive but poorly received by customers.
Other elements of the marketing mix are in conflict.
Industrial products are less responsive to advert $$.